MicroVision Inc (MVIS) 2013 Q1 法說會逐字稿

Welcome to the Q1 2013 MicroVision Inc. Financial Results Call. My name is John and I'll be your Operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note this conference is being recorded. I will now turn the call over the Ms. Dawn Goetter, Director of Marketing Communications. Ms. Goetter, you may begin.

Thank you. I'd like to welcome everyone to MicroVision's First Quarter 2013 Financial and Operating Results Conference Call. In addition to myself, participants on today's call include Alexander Tokman, President and Chief Executive Officer; Steven Holt, Chief Financial Officer; and James Johnston, Controller.

The information in today's conference call may include forward-looking statements, including statements regarding benefits under existing contract, and the negotiation of future agreements, our competitive advantages, progress with prospective customers, projections of future operations and financial results, product development, applications and benefits, availability and supply of product and key components, market opportunities and growth and demand, plans to manage cash used in operations, as well as statements containing words like believes, goals, paths, expect, plans, will, could, would, and other similar expressions. These statements are not guarantees of future performance. Actual results could differ materially from the future results implied or expressed in the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are included in our most recent Annual Report on Form 10-K filed with the Securities Exchange Commission, under the heading Risk Factors relating to the company's business, and our other reports filed with the Commission from time to time. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changes in circumstances or any other any reason.

The agenda for today's call will be as follows -- Alex will report on the operation results. Steve will then report the financial results. There will be a question-and-answer session, and then Alex will conclude the call with some final remarks.

I now would like to turn the call over to Alex Tokman. Alex.

Thank you, Dawn. Good morning, everyone. Thanks for joining us today. Before I begin, let me briefly introduce Steve, Steve Holt, our new CFO. Steve brings over 20 years of global financial management and operations experience with public and private companies across several industries, including consumer electronics software transportation. He most recently served as a CFO at PixelOptics, where he played a key role in bringing the company's first electronic eyewear product to market. In addition to his extensive financial management and accounting background, Steve has a proven track record of successfully implementing operation initiatives at the company he served. We're glad to welcome Steve to MicroVision's family.

Now, let's move on to business update. A few months ago, we reported very positive progress and results around key operating metrics for 2012, and I am pleased to tell you that this positive trend has continued in the first quarter of this year, as we made demonstrable progress on our main 2013 objectives.

Let me recap our three primary 2013 goals that were stated in February, and then we will discuss the progress on each we made during this quarter. The three primary goals included securing design wins, and entering into development and licensing agreements with OEMs; second, strengthening the supply chain for key components of PicoP display technology to offer multiple sources to OEMs as they plan to bring their products to market; and finally, to further reducing cash used in operations.

Let's start with the goal number one. On April 3, we announced an important development agreement with a major electronics brand to incorporate our patented PicoP display technology into the customer produced display engine that could enable a variety of new products for this global Fortune 100 electronics company. If you want to know the importance of this deal, without a question, it is the most important agreement in the history of MicroVision to date for a variety of reasons.

The development agreement included $4.6 million in fees for the support we will provide to our new OEM partner over the coming months. This agreement, obviously, is part of the overall design win process, as we help our new customer with product development efforts, we expect to continue the commercial negotiations on supply and licensing terms.

This important milestone was the result of several developments that were completed in 2012. Last year, we made significant progress on further increase in the value proposition of PicoP display technology through various performance enhancements, and a very strong roadmap. Today's solution, today's PicoP display solution, possesses the attributes simply unmatched by others. It is the only HD-capable focus-free pico projection technology in the market that offers an immersive experience. It allows a multi-hour operations from a single battery charge. It can be delivered in a tiny package, whose size does not increase as it gets brighter and brighter.

Higher brightness at a low power are the two -- are the main attributes that are particularly important to the mobile industry, as no one wants to see their devices drained of power after less than one hour of operation. Today, our brightness to power consumption ratio is superior to any other competitive solution, and we believe strongly that this ratio will remain superior to other solutions in the foreseeable future.

Now, last year remember, we shipped design samples of -- to over 50 prospective customers to allow them to test drive our new PicoP display technology that was designed around new direct green laser. Most of these prospective partners reached out back to us after they completed their internal technology evaluation phases in the latter part of 2012, and indicated an interest in discussing a go-to-market strategy for their product -- products.

We then had to prioritize this global interest, and we selected the vital few targets to focus on first. As a result, in addition to the recently announced OEM agreement, we have continued to make a solid progress with several other prospective customers that are interested in creating consumer and automotive products that would incorporate our PicoP display technology.

At this point, let me now shift to goal number two, supply chain. This is also a very important goal. I'll explain to you in a moment why. We made significant moves to build a stronger supply chain to facilitate the adoption of PicoP display technology by global OEMs. Of the many pieces that comprise our PicoP display engine, there are four indispensable components that are very difficult to reproduce. These include lasers, MEMs, the optical module that houses lasers and MEMs, and obviously, the system control software that serves as a brain for the whole engine.

As many of you are aware, the green laser supply issue that hindered us in the past has been greatly alleviated in the second half of last year, after we launched first product with Pioneer. And today, global OEMs see a path to a high-volume, low-cost green laser solution from several reputable sources.

Now that the green laser supply is being addressed, MicroVision's next goal this year is to develop and cultivate more than a single source of supply for two other critical components, specifically, the optical engine, and MEMs. We made significant progress towards identifying that ends, and enlisting new supply chain partners for both of these components. The goal is to offer to our future OEM licensing partners an access to a larger volumes and lower cost components to meet their growing demands for products.

Finally, in line with the objective of furthering cash used in operations, we have shown tangible results during the first quarter of this year versus a year ago, as both operating and net losses were reduced by almost two-thirds, primarily as a result of both improved gross margins, and significant reduction in operating expense following the last year restructuring efforts.

With this, I will turn over to Steve to provide you with more details. Steve.

Thank you, Alex. It's great to be here. As I've been in the CFO position for just 8 days, I've asked our Controller, Jim Johnston to join me on this call. I'll cover revenue, operating expenses, operating and net losses, and our cash usage and position.

In the first quarter, our revenue was $1.8 million. This is up slightly from $1.7 million in Q1 of 2012. The $1.8 million is comprised of $1.2 million in product revenues, and $600,000 of contract and development revenue.

Operating expenses, as has been mentioned, we reduced our operating expenses significantly from Q1 of last year. Operating expenses for Q1 of 2013 were $4.7 million, compared to $7.2 million in Q1 of 2012, a reduction of $2.5 million, or about 36%.

On the operating and net losses, the Q1 2013 operating loss was $3.7 million, and the net loss for the quarter was also $3.7 million, or $0.14 a share. This compares to an operating loss of $9.8 million, and a net loss of $9.8 million, or $0.58 a share in Q1 of 2012. The main reason for the decreased loss was a reduction in the operating expenses, and improvement in margins.

On to cash, cash used in operations for the quarter ending March 31, 2013, was $3.5 million. This compares favorable to the $6.2 million used in the year ago quarter. Again, the principal reduction in cash usage came from the decrease in operating expenses.

Cash on hand at the end of the quarter was $3.3 million. And the accounts receivable balance at March 31 was $1.5 million.

And finally on backlog, backlog for the quarter was $5.1 million. Of this $4.3 million related to the agreement that we announced in April, and approximately $500,000 relates to Pioneer shipments. In addition, there was $363,000 in deferred revenue as of March 31.

We will now open it up for questions.

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question comes from Andrew Uerkwitz from Oppenheimer & Company. Please go ahead.

Hi, can you hear me?

Yes.

Alex, this is Andy Yeung on behalf of Andrew Uerkwitz. I have two questions. Can you talk about how close are you to another OEM win?

A great question. As you know, we just announced our first consumer electronic win in April. We're focusing on -- of the response we received at the end of last year, more than 40 responses of interested parties, we prioritized them in groups of 5s. We're focusing on the first group of 5. Our goal is to complete additional agreements in 2013.

Can you be more specific in terms of the time line? Are you expecting the first half, second half?

It's not easy to pinpoint the specific dates. So, we have our goal is to complete additional agreements this year.

Got you. Thanks. And my second question is about the announced design wins, about this new consumer electronics customer. Are they working on multiple projects that utilize your PicoP live inch?

I think I understand your question. You basically -- your question is, is the engine that we've been -- we will be -- we are developing, is this going to be targeted for multiple products? The answer is yes.

I was talking about the way you announced with that global Fortune 100 electronics company, is your engine extending to multiple projects within that company?

The answer is yes.

Got you. Thanks.

Our next question comes from Mike Latimore from Northern Capital. Please go ahead.

Great. Thanks a lot. Hi, guys. On the new win here, are they replacing legacy technology with your technology, or is this kind of a brand new initiative for them?

This is a brand new initiative.

Okay. And then in terms of revenues you would have in the second quarter, would the majority come from this one contract, or do you see other revenue sources?

We exactly have several revenue sources in second quarter. Remember, we're still fulfilling the orders for Pioneer, and we have revenue coming from Pioneer, this source as well as some other sources.

Alright. And I think in the past you've given a rough percent of prospects that are in the consumer versus auto market. I think that was based on number of prospects. But, can you just kind of update that, and is that also reflective of the revenue opportunity by those two categories, consumer and auto?

Okay, great question, Mike. So, recall last year when we shipped -- we had a request from over 50 people. We shipped design samples once they became available to over 50 global OEMs. They were distributed such 40% came from consumer markets, 50% from automotive, and 10% from other. Within -- so, the big pool comes from primarily two areas, consumer and automotive. It appears to be -- we expect, the consumer applications are focused on pico projection, whether they're attachments, embedded, or accessories. And automotive is focused primarily on head-up display, and there's a huge momentum on the embedded head-up display from all over the world.

Our goal is to figure out, separate pretenders from contenders. Focus on people who are more committed than interested, and moving these deals forward.

So, in terms of revenue side, revenue opportunity, are you seeing more in the consumer or auto side, I guess.

The revenue opportunity will always be greater in the consumer sector, primarily because of volume. Margins would be better -- slightly better in automotive.

Great. Okay. And then you talked about getting more optical engines and MEMs supply out there. Can you kind of just qualitatively describe whether that's as big of a hurdle as the direct green laser supply that we saw in the past?

No, absolutely not. Direct green laser is something we had no control over. We could influence. We could plead. But we did not have direct control. With MEMs, we have more direct control, so we have control of our own destiny, who we select, how do we move forward, and how do we execute. And we have not had any issues in execution on MEMs to date, and we expect that this will continue.

Nice. And I guess the last question is, do you see the prospects for any sort of upfront license payments on any of the deals you're negotiating? And then second, what kind of margin might you see on the development fee here with this announced deal?

Great, great questions. So, first of all, yes, one of the things when you have a huge interest from around the globe, the way you filter whether people are serious or not, are they willing to commit upfront. And one of the reasons we signed this deal, because customer with so much of it, it had a very compelling business case, and we're willing to give us upfront before the products are introduced.

So, we're looking at situations like this. Obviously, you can't expect these types of amounts every time, but the point is we're looking at partners who are showing commitment by putting something upfront, whether it's NRE, or whether it's some upfront license fee. When we prioritize our larger funnel, top group contains these type of elements.

In terms of margin, I can't specifically talk about this deal, but I can tell you our goal is to have margin, gross margin above 40%. It will be mixed. In consumer electronics, it will be slightly less. In automotive it will be slightly more. But we want to average around 40% or greater.

That's the combined product and development fee kind of margins. That's the company margins you're talking about.

You're talking about what is specific -- again, this is something that we did not introduce when we announced the agreement, because certain parts are held confidential per request of our partner. So, I can't tell you specifics on this contract.

Alright. Great. Thanks a lot.

Our next question comes from Andrew D'Silva from Merriman Capital. Please go ahead.

Hi, guys. Just got a couple quick questions for you. The first one is, what was the primary reason for the gross margin reduction? I mean, you definitely improved that dramatically in the quarter.

Reduction or improvement?

It's the improvement.

Improvement.

The reduction costs.

It's simple, Andrew. Remember, year-over-year, last year we were selling SHOWWX product that was based on Gen1 technology. Even though the product was very successful through Amazon channels, through Apple channels, we were not making money because each green laser cost us more than $100. So, this year most of the revenues comprised of the next-generation technology that is built around red-green laser, which is much more cost effective, plus we migrated to our core licensing model, which is higher margin. So that's the primary -- these are the primary reasons.

(inaudible) an improvement in the technology, improving your profitability in the long run. Also I guess the next question is, how do you feel about your capital situation right now? Do you think you have enough cash on your books to continue operations for the next year or so?

Yes, we feel much better, because we executed a restructuring program to basically to significantly reduce operating expenses, so that we can expend cash longer, and would require less external cash to get to our objective. We ended the quarter, as Steve mentioned, with about $3.3 million, and that does not include some additional payments we received subsequent to it. And we feel that, as you know, we're continuously monitoring the market conditions. We're speaking to strategic investors, and our goal is to assess all of our available option, and then determine the best one that is in the best interest of the company and every shareholder.

Great. That's all I have for right now.

Our next question comes from [Tom Zulist] from No Limits Capital. Please go ahead.

Alex, congrats on the win, design win. Question, where are we at lumens, and where do you see, theoretically, were going to be able to go with the existing generation?

This is excellent question, Tom. One of the things that everybody quickly figured it out in 2010, when the initial PicoP projection products were introduced, is that obviously 10 lumen is not sufficient. Everybody wants to have something on the order of 25 or greater. The larger question -- the larger question is not about the lumen, it's about how big of a screen size can you get in a different ambient light environment. And it's not only a function of the absolute lumen, but also a function of technology. Do you use LEDs, or you use lasers? Do you use panels, like DLP, and LCoS, or do you use mirrors, single mirrors, such as us?

And that's -- this has to be balanced directly against the power consumption, because everybody wants higher brightness, but no one wants to give us the battery operation. So, there is a tradeoff that needs to be made. And as I mentioned earlier on the call, what people are really looking, is to have the greatest brightness to power consumption ratio. Because it allows you to create compelling image, and at the same time allow device to operate for 2, 3, 4 hours in order to watch a movie.

Today, luckily for us, we're one of the very few, if not the only company, that can allow it to do this. So, we have devices today that range from 25 to 35 lumen, and we're towards 50 lumen display. At the same time, our power reduction is fraction for what it is for other technologies. So, this is one of the reasons that people seriously considering us.

Because they always knew we had this advantage. But in the past, they were stopped because no one had access to the right green laser. This was alleviated at the end of last year. And now we have the advantages with, finally, the green laser landscape has improved tremendously. So, we have a lot of interest.

Now, you recently filed some patents, which give you a higher efficiency in that you can calculate the distance of your actual image being projected, and then you adjust your power accordingly. It appears from what I've seen that there's really no way to get around that, and that your technology with these patents seems to be one of the most efficient systems out there. Is that correct?

That's totally correct. Remember, one of the things that we do, we place a very strong focus on innovation. And I want to use this word loosely, because everybody's using it. But innovation in the sense that we want to always be ahead of everyone by at least several years. As an example, remember we introduced a feature that this sits on top of our core technology, called Touch, Interactive Touch. So you basically can display an image, and at the same times use your fingers to articulate information in the image.

Now, how can you do this? You can do this because our technology is truly reversible. So, you can not only display it, but also capture information. And that's one of the features that you just mentioned. So, we can obviously detect any object in the beam, and measure any distances, and that's, you're right, this type of IP is very important, and its what keeps people interested.

Because most people, to be honest with you, most global products companies, they're not just seeking a display application. Everybody can display. What they want to know -- what else can you do with this to entice the consumer? And they way you entice the consumer is that you have the best projection technology, but also show that you can do something completely different, radically different with it, such as using your finders in the air, articulate and object, or converging into 3D technology. Or measuring any distances, and then adjusting your display according to the best conditions that are available.

So, based on where you are today, and the patents that you have going forward with some of these additional technologies, that's what lends yourself to be such a compelling solution, because not only are you the perfect solution now, but you're also new generations will be able to enhance everything you're doing. Is that correct?

That's what we hope, and that's what we think. But obviously it's going to be validated by others, and we hope that you're going to see the results of this validation shortly I think the examples that you've seen right now are the first steps in that process.

Great. Nice work. Thank you. Appreciate it.

Thanks, Tom.

Our next question comes from Randy Hough from ProEquities. Please go ahead.

Good morning, fellows. Alex, let me just dovetail into the last question you answered. On the recording capabilities of our technology, could it be developed to such a state where it could become a true camera recording device, and then be optimally turned around to project the image recorded in the mobile device?

Randy, it's a function of applications. For example, if you want to do something for your day-to-day consumer applications, there are very cheap CMOS cameras that would achieve the same objectives. But if you need something higher resolution for completely non-consumer applications that require laser light, and more precision, absolutely. It could serve that. We actually have some applications in other industries that people are interested in that we would consider after we launch a couple of consumer and automotive products.

So, yes, we have opportunities. As you know, we shelved some of these opportunities to focus on the core vital few. After we become successful with the consumer and automotive products to start with, we immediately migrate and start exploring and proliferating other exciting applications that include something related to capturing information so. And they have value in some of the industries to the degree you were -- could become a significant business in the future as well.

So, it's not likely, then Alex, that the recording application would be developed to the point where it would be that wow factor, additional thing that you mentioned a minute ago that OEMs are looking for in a mobile device as they are currently formed.

Just taking pictures, you already probably have the best technology in terms of cost performance which exists today. However, if you want to enhance the adoption of the display application, our technology allows to combine these two functions in one, and provides overall cost effective solutions. So, in pico projection applications, absolutely. We see the benefit of the capturing imagery combined with displaying imagery as a huge enhancer for our technology.

But, if you're asking, could this replace just a regular digital camera, there's no need for it because the digital camera technology is mature and cheap enough that it doesn't need to replaced by anything.

Okay. Yes, that nails it down. But let me bridge over into content, since we're talking about content. Obviously, if there were no rich and desirable content out there in the world, you wouldn't need a projector. So following that, the converse of that, since we have so much content out there, in selecting your customers and grouping them as you have, Alex, that you explained earlier, would the ideal group, or individual customers be one that's vertically integrated in the sense that they not only have a variety of platforms in the form of mobile devices, but also would own their own content?

Would that be a desirable combination that you're seeking in terms of OEMs you would rather do business with than those that simply have the technology, but no content?

Yes, the short answer is absolutely yes, Randy. Because remember when I discussed this, how do we filter this global demand. We look for players who, not only sell hardware, but also benefit from having pico projection technology in other sources. And this includes content, this includes software, this includes gaming, this includes a variety of different categories.

So when we -- not everyone has all these pieces. There's about 6 pieces. If you look -- it's hardware, software operating system. It's number two. You get content, video content. You have special content, which is game, and it's number four. You get services, and you have advertisements. You've got these 6 pieces. Not a single company in the world has all these 6 pieces, but there are companies that have 4 of these 6 pieces. So, we have been focusing on these companies heavily.

Okay, good. And then, Steve can't leave you out. Let me go back to the -- first, welcome aboard.

Thanks.

On the question about the margins. I think you addressed it, but I'm not quite sure. On the fees that were received, what was it $4.6 million, that was going to be received from this yet to be named OEM. Is that kind of - should we account for that as in any way a positive contribution to cash when it's all netted out, or is this strictly a contracted that the whole $4.6 million is projected to cover exactly the services that are provided under the contract by MicroVision employees so that it's just a flat net cash in, cash out kind of thing?

It's a collaborative R&D agreement, and the -- we're getting a cash benefit from it, as well as getting a technology development benefit from it. And it is, I guess. The cost that we're incurring, particularly incrementally on this agreement are lower than the fees that we're getting in. In fact, it's kind of getting to your question.

Yes, that's exactly what I was looking for. So, I would interpret that to mean that it is a net positive to cash when all is said and done.

Yes, absolutely.

Thank you very much. That's it.

We have no further questions at this time. I'll turn it over to Alexander Tokman for final closing comments.

Well, needless to say, we are very excited to engage the major electronics brand and plan to actually work with our new customer this year to both enable their solution, and to progress in negotiation on the licensing and supply terms. We're also very enthusiastic about the growth opportunities that can result from our internal efforts with technology advancements, securing new customers, combined with the significant improvements in the green laser supply, and the external market conditions that appear to be favorably aligned to our business objectives. We regularly see news and stories that illustrate the favorable market trends for pico projection.

For example, AccuStream Research reported that digital video unit audience topped $500 billion mark. Most of us use digital content on their mobile devices, smartphones and tablets. For example, on the HUD front in the recent Wall Street Journal article, an analyst from Tokyo based Fuji Chimera Research Institute was quoted that HUD sales would grow 10x from today at 800,000 units to 8 million within decade. And these are just few examples. There are many, many more.

The development of Google has been investing in Google Glass. We're excited about this because the platform that we're developing is well-suited for eyewear applications as well. So, a lot of good momentum in the market, and we're very excited about this.

At this point, we will conclude this call. We are looking forward to updating you on the progress we make against the three primary goals we set forth for 2013, and would like to thank you on behalf of Dawn, Steve, Jim for joining us this morning, and we'll see you soon.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.